Fed officials may be cutting rates because they are worrying about the ominous "long and variable lags" of their monetary policy tightening from March 2022 through August 2024. But there are still no signs that those lags exist as the economy continues to chug along.
It's true that the Index of Leading Economic Indicators (LEI) fell yet again during October, but it has been a misleading indicator of a recession since it peaked at a record high during December 2021 (chart). The S&P 500 has been the most accurate of the 10 components of the LEI as it has been rising to new record highs since the start of this year. Even better has been the Index of Coincident Economic Indicators, which never flinched as it rose to new record highs while the LEI was diving.
The upturn in US Treasury note and bond yields since the Fed started cutting the federal funds rate (FFR) on September 18 reflect the rebound in the Citigroup Economic Surprise Index (chart). In our opinion, this suggests that the neutral FFR is probably closer to the 5.25%-5.50% range (just before September 18) than the current 4.50%-4.75%. If so, then economic growth is getting an extra boost from easier Fed policy. Fed officials disagree with us. They think that the FFR remains restrictive and needs to be lowered closer to 2.90% though gradually rather than in a rush.
Today's data showed continued solid growth and an even brighter outlook for manufacturing:
